Study recommends changes to benefit competion

The
Commerce Commission has released its final report into the
retail fuel market and has recommended changes to stimulate
competition and benefit consumers.

“As a result of
our study, we consider many fuel companies have been making
persistently higher profits over the past decade than we
would expect in a workably competitive market. For
consumers, this means they are paying higher pump prices
than could be expected,” Commission Chair Anna Rawlings
said.

The Commission used a range of indicators to assess
the profitability of fuel companies. This includes import
margins more than doubling over the past decade, fuel
company returns double the Commission’s estimate of a
reasonable return, some new retail sites being paid off
unusually fast, and fuel companies market values being
significantly higher than their physical costs to
build.

“There are indications that returns have peaked
and are stable. However, profitability is expected to remain
high for some time and we are not convinced that the
industry’s experience of excess returns has come to an end
under current policy settings.”

The Commission also made
other observations during its study which indicate the
market is not working as well as it could for consumers.
These include:

• Regional differences in retail fuel
prices reflecting the level of local competition

•
Discounting and loyalty schemes being used to avoid direct
competition on board prices, and

• An increasing
difference between regular and premium petrol margins which
are not all explained by cost differences.

The Commission
believes the core problem is that an active wholesale market
for fuel does not exist in New Zealand.

“The major fuel
companies, Z Energy, BP and Mobil, share a joint
infrastructure network which includes the Marsden Point
refinery, coastal shipping operations and storage terminals
at regional ports. They use this network to supply 90% of
the nation’s fuel through their own branded retail sites
or via other distributors or resellers via exclusive
long-term wholesale supply contracts. The only other fuel
importer is Gull, with a terminal in Mt Maunganui,” Ms
Rawlings says.

“The combination of infrastructure
sharing and restrictive supply relationships gives the major
fuel companies an advantage. There is a reduced ability for
importers to compete for customers of the majors and for
distributors and dealers to obtain competitive wholesale
supply terms.”

The Commission acknowledges there are
some positive industry developments underway. These include
fuel company innovations like pay at the pump technology
benefiting consumers, the establishment of Timaru Oil
Services new import terminal in Timaru, expansion by Gull
and resellers including Waitomo and NPD, and the
electrification of vehicles.

“While these developments
could improve outcomes for consumers over the long-term,
they do not address the core problem we have identified with
the wholesale market.”

The Commission has made a series
of interdependent recommendations to improve competition,
mainly targeted at creating an effective wholesale
market.

The Commission recommends introducing a Terminal
Gate Pricing Regime, based on the Australian equivalent.
This requires all importers to offer a spot price at which
they will sell fuel to wholesale customers at storage
terminals.

“We consider this regime will improve
competition by creating the potential for a liquid spot
wholesale market to develop, lower barriers to entry and
expansion for rivals, provide greater price transparency for
wholesale customers, and provide competitive benchmark
information for industry and government.”

These two recommendations would be implemented via
an enforceable Industry Code of Conduct.

To improve
competition in retail markets, the Commission has made
several recommendations to help consumers make more informed
purchasing decisions. These include regulations to require
retailers to display premium fuel prices on price boards and
fuel cap stickers to help consumers understand what grade of
fuel their vehicle requires.

The Commission has also made
a series of other supporting recommendations. This includes
improving information and record keeping about the fuel
market for future analysis, as well as encouraging major
fuel companies with shared infrastructure arrangements
to:

• Publish the criteria and the process for
participation in the arrangements

• Review aspects of
the arrangements that may disincentivise investment in
shared storage

• Review information sharing about the
arrangements to reduce the potential for coordination.

The
full report, executive summary and infographics showing our
key findings and recommendations are available here.

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